Revised Summer 2010 Page 1 of 21 CHAPTER 2 SYSTEMS DESIGN: JOB ORDER COSTING Key Terms and Concepts to Know Job-Order Costing vs. Process Costing Job-order costing is used for companies that produce different products each period. Costs are accumulated for each job. Process costing is used for companies that produce many identical units of a single product for long periods of time. Costs are accumulated by manufacturing department. Key Job-Order Costing Documents Material requisitions request materials for production and support direct materials costs charged to each job. Time cards or time tickets record direct labor hours used in production and support direct labor costs charged to each job. Job cost sheets are the most important job costing document. They summarize all of the key information about the job and accumulate total direct materials costs, total direct labor costs and overhead costs applied to the job to determine the total costs for the job. Actual Manufacturing Overhead vs. Manufacturing Overhead Applied Actual manufacturing overhead costs are the indirect manufacturing costs incurred in the production process. Manufacturing overhead applied are the overhead costs added or applied to each job during the production process. These costs are added to work-in-process to become part of total manufacturing costs along with direct materials and direct labor. Key Topics to Know Choosing a Cost System
Transcript
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CHAPTER 2 SYSTEMS DESIGN: JOB ORDER
COSTING
Key Terms and Concepts to Know Job-Order Costing vs. Process Costing
Job-order costing is used for companies that produce different products each period. Costs are accumulated for each job.
Process costing is used for companies that produce many identical units of a single product for long periods of time. Costs are accumulated by manufacturing department.
Key Job-Order Costing Documents
Material requisitions request materials for production and support direct materials costs charged to each job.
Time cards or time tickets record direct labor hours used in production and support direct labor costs charged to each job.
Job cost sheets are the most important job costing document. They summarize all of the key information about the job and accumulate total direct materials costs, total direct labor costs and overhead costs applied to the job to determine the total costs for the job.
Actual Manufacturing Overhead vs. Manufacturing Overhead Applied
Actual manufacturing overhead costs are the indirect manufacturing costs incurred in the production process.
Manufacturing overhead applied are the overhead costs added or applied to each job during the production process. These costs are added to work-in-process to become part of total manufacturing costs along with direct materials and direct labor.
Key Topics to Know
Choosing a Cost System
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Job-order costing is used by companies with multiple unique products which generally have a low to moderate annual production volume.
Example #1 Which method for assigning costs to products would be more appropriate in each of the following cases?
a) Cruise ship builder b) Cornflakes factory c) Law firm d) Dentists office e) Beverage bottling company
Solution #1
a) Job-order costing (every ship is a separate job) b) Process costing c) Job-order costing (every case is a separate job) d) Job-order costing (every patient visit is a separate job) e) Process costing
Applying Manufacturing Overhead
Manufacturing overhead is applied or added to each job while it is in process. There are three kinds of overhead costs consider:
o Estimated overhead cost which is determined from the annual budget prepared before the year begins and is used only in the pre-determined overhead rate calculation
o Actual overhead cost which is incurred periodically throughout the year and debited to the manufacturing overhead account
o Applied overhead cost which is added to jobs in the work-in-process inventory account throughout the year and credited to the manufacturing overhead account
The manufacturing overhead account is a holding account for the actual overhead costs (debits) and applied over costs (credits).
o Actual overhead costs flow into the account as they are incurred o Applied overhead costs flow out of the account as the jobs flow through the
production process. o The account balance may be either debit (underapplied) or credit
(overapplied). o Underapplied overhead represents an expense which must be transferred to
cost of goods sold. o Overapplied overhead represents a reduction of expense charged to jobs
which must be transferred to cost of goods sold.
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Manufacturing overhead is applied to jobs in work-in-process using the following formula:
Overhead applied = Pre-determined overhead rate X amount of allocation
base incurred by the job
The predetermined overhead rate is computed before the period begins:
Pre-determined overhead rate = Estimated annual overhead costEstimated amount of the allocation base (denominator activity)
Example #2 ABC Company uses job-order costing. It incurred the following costs for job M301: 20 pounds of raw materials (all direct) were issued to be used for job M301 at a cost of $7 per pound. Three people were assigned to work on Job M301 at a rate of $12 per hour. Records show that a total of 25 direct labor-hours were worked on Job M301. Manufacturing overhead is applied based on direct labor-hours. At the beginning of the year, estimated total manufacturing overhead was $450,000 and the total direct labor-hours incurred would be 50,000. Required: Determine the cost assigned to Job M301. Solution #2
Direct materials 20 pounds X $7.00 = $140 Direct labor 25 hours X $12.00 = $300 Manufacturing overhead 25 hours X $9.00 = $225 $665
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Flow of Costs Through Inventory Accounts
Raw Materials Work in Process Finished Goods Cost of Goods Sold Beginning Balance
Beginning Balance
Beginning Balance
Beginning Balance
-DM
Usage +DM
Usage
+Purchases +DL
Usage
-COGM +COGM -COGS +COGS
+MOH Applied
=Ending Balance
=Ending Balance
=Ending Balance
=Ending Balance
Manufacturing
Overhead
Beginning Balance
+Actual
overhead costs incurred
-MOH applied
=Under-
applied = Over-applied
With the exception of overhead, this is the same process described in Chapter 1. Actual overhead costs incurred are now flow through the Manufacturing Overhead
account instead of directly into the work-in-process inventory. The balance in the manufacturing overhead account may be a debit or credit,
depending on whether: o Debit if the overhead applied is less than the actual overhead costs incurred
(underapplied) o Credit if overhead applied is more than the actual overhead costs incurred
(overapplied). Some companies may use departmental predetermined overhead rates rather
than the single plant-wide predetermined overhead rate shown here in an effort to make the overhead application process more accurate.
In Chapter 8 and 9 terms, the balance in the overhead account is: o A favorable variance if it is overapplied o An unfavorable variance if it is underapplied
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The basic journal entries to record the flow of costs through the inventory accounts are:
Purchase of raw materials Raw material inventory xxx
Underapplied Cost of goods sold xxx Manufacturing overhead xxx
Overapplied Manufacturing overhead xxx Cost of goods sold xxx
Summary of Manufacturing Overhead Accounting
At the beginning of the period Estimated amount of MOH / Estimated amount of allocation base = Predetermined overhead rate
During the period
Predetermined overhead rate x Actual amount of allocation base incurred = Total manufacturing overhead applied
At the end of the period Actual manufacturing overhead cost – Total manufacturing overhead applied = Underapplied (overapplied) overhead Underapplied (overapplied) overhead is closed to Cost of Goods Sold.
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Example #3 ABC uses job-order costing. It applies overhead cost to jobs on the basis of direct labor-hours. For the current year the company estimates that it will work 20,000 direct labor-hours and will incur $650,000 of manufacturing overhead. The following transactions took place during the year:
a) $300,000 of raw materials were purchased on account b) Raw materials were issued into production, $90,000 direct materials and
$50,000, administrative salaries $100,000 d) Utility costs for the factory were $60,000 e) Depreciation recorded was $300,000 (70% related to factory; 30% related
to administrative offices) f) Manufacturing overhead was applied to production. Actual direct labor-
hours incurred were 22,000. g) Units costing $300,000 were completed and transferred into the finished
goods inventory. h) Goods with a cost of $150,000 were sold on account for $200,000. i) Closed the under/overapplied overhead for the year.
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Solution #3 a) Raw materials 300,000
Accounts payable 300,000
b) Work in process 90,000 Manufacturing overhead 40,000 Raw materials 130,000
c) Work in process 40,000 Manufacturing overhead 130,000 Sales commission expense 50,000 Administrative salaries expense 100,000 Salaries and wage payable 320,000
Practice Problems Practice Problem #1 Company XYZ makes custom motor boats. It incurred the following costs for the just-completed job B011. 500 pounds of direct materials were used at a cost per pound of $25. The job cost sheet indicates that a total of 90 direct labor-hours incurred on job B011. The workers were paid at a rate of $18 per hour. The company applies overhead based on machine hours. At the beginning of the year, it was estimated that the total amount of overhead would be $180,000 and a total of 30,000 machine hours would be incurred. Job B011 required 150 machine hours. Required: Determine the total cost assigned to Job B011. Practice Problem #2 X company uses job-order costing. It applies overhead cost to jobs on the basis of direct labor cost. For the current year, the company estimates that it will incur $25,000 in direct labor cost and $550,000 of manufacturing overhead. During the year, $30,000 of direct labor costs were incurred. Actual overhead costs incurred were:
a) Compute the company’s predetermined overhead rate. b) Compute the amount of over or underapplied overhead. c) Prepare the necessary journal entry to close the over or underapplied
overhead.
Practice Problem #3 Theodore’s Cookies had 3 cookie orders in production at June 30: chocolate chip, oatmeal raisin and peanut butter. Material costs for chocolate chip and peanut butter were $500 and $350. Direct labor costs per batch were $200 and $250 for chocolate chip and oatmeal raisin, respectively and $600 in total. Overhead is applied at the rate of 50% of direct materials costs. Total costs for the oatmeal raisin batch were $1,150. Required: What was the balance in work-in-process at June 30?
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Sample True / False Questions 1. When raw materials are issued into production the Raw Materials account is
debited. True False
2. Manufacturing overhead account is debited for the actual overhead costs incurred. True False
3. Job cost sheets are used in a process costing system. True False
4. Process costing is appropriate when a large number of identical products are produced. True False
5. In a normal costing system manufacturing overhead is applied by multiplying the predetermined overhead rate by actual amount of the allocation base. True False
6. The predetermined overhead rate is computed using actual amount of overhead. True False
7. Underapplied overhead means that the actual overhead was less than the applied overhead. True False
8. In the journal entry to close overapplied overhead Cost of Goods Sold is credited. True False
9. Finished Goods inventory account is credited for the amount of cost of goods manufactured during a period. True False
10. When direct labor costs are incurred, Work in Process is debited. True False
11. Factory rent should be assigned equally between manufacturing overhead and selling and administrative expenses. True False
12. Selling expenses are applied to production using a predetermined overhead rate. True False
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13. The predetermined overhead rate is computed based on estimates. True False
14. Indirect materials are part of manufacturing overhead. True False
15. Work in Process is a control account that contains a summary of all individual job cost sheets for all jobs in process at a point of time. True False
16. When goods are sold, the Work in Process account is credited. True False
17. Manufacturing overhead account is debited for the amount of overhead applied to Work in Process. True False
18. The predetermined overhead rate for the year is computed at the end of the year. True False
19. A company that produces cornflakes will most likely use a job-order cost system. True False
20. Indirect materials issued into production should be debited to Work in Process. True False
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Sample Multiple Choice Questions
1. A cost driver is: a) Factor that causes overhead costs b) Part of direct materials c) Cost of goods sold d) Expected to be offset in future months
2. Which of the following statements is false?
a) The manufacturing overhead account is credited when manufacturing overhead is applied to Work in Process
b) Cost of Goods Sold is debited for the amount of overapplied overhead c) Work in Process inventory account is credited when products are transferred
to Finished Goods d) Manufacturing overhead is applied to Work in Process using a predetermined
overhead rate 3. XYZ Company applies overhead on the basis of direct labor-hours. The following
data are available: Estimated annual overhead cost $450,000Actual annual overhead cost 580,000Estimated direct labor-hours 25,000Actual direct labor-hours 20,000
Compute the amount of overhead applied during the period and the amount of under or overapplied overhead (if any). a) $450,000 applied and $130,000 underapplied b) $360,000 applied and $220,000 underapplied c) $580,000 applied and no under or overapplied overhead d) $360,000 applied and $220,000 overapplied
4. Overapplied overhead means that:
a) Actual overhead is more than overhead applied b) Actual overhead is equal to overhead applied c) Overhead applied is less than actual overhead d) Actual overhead is less than overhead applied
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5. ABC Company applies overhead on the basis of direct labor costs. The estimated amount of direct labor costs for the year was $35,000. The predetermined overhead rate for the year is 150% and manufacturing overhead applied was $45,000. What is the amount of actual direct labor costs incurred during the year? a) $67,500 b) $52,500 c) $30,000 d) $53,000
6. During the year X Company estimated that it will incur the following costs for Job
090: $400,000 direct materials; $40,000 direct labor; $120,000 manufacturing overhead. Overhead is applied based on direct labor costs. Job 090 was completed during the period and it incurred the following actual costs: $350,000 direct materials; $43,000 direct labor; manufacturing overhead $135,000. The amount of under or overapplied overhead was: a) $6,000 overapplied b) $15,000 underapplied c) $15,000 overapplied d) $6,000 underapplied
7. If the manufacturing overhead account has a credit balance at the end of the
year, it means that: a) Overhead was overapplied b) Overhead was underapplied c) Overhead was not applied d) The amount of actual and applied overhead was the same
8. A company applies overhead based on machine hours. The predetermined
overhead rate for the year was $25 per machine hour. Actual machine hours were 8,000. The amount of underapplied overhead was $4,000. What was the amount of actual overhead costs incurred? a) $200,000 b) $196,000 c) $204,000 d) $150,000
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9. XYZ company had the following data for the current year: Work in Process, beginning balance $420,000Direct materials used in production 30,000Direct labor 55,000Actual overhead 70,000Overhead applied 65,000Work in Process, ending balance 40,000
Determine the amount of cost of goods manufactured during the year. a) $155,000 b) $530,000 c) $535,000 d) $195,000
10. ABC company had the following data for the current year:
Work in Process, beginning balance $110,000Direct materials used in production 45,000Actual overhead 60,000Overhead applied 70,000Work in Process, ending balance 30,000Cost of goods manufactured 235,000
Determine the amount of direct labor cost incurred during the year. a) $50,000 b) $45,000 c) $40,000 d) $35,000
11. The beginning balance of Raw Materials inventory was $10,000. During the year
purchases of raw materials for $125,000 were made, but only $75,000 were paid. The balance of Raw Materials at the end of the year was $30,000. What was the amount of raw materials used in production? a) $55,000 b) $95,000 c) $45,000 d) 105,000
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Questions 12 through 15 refer to the following information. Z Company uses a job-order costing system and applies overhead based on direct materials used in production. For the recent year it estimated that $150,000 of manufacturing overhead will be incurred and $100,000 of direct materials will be used. The following data were taken from the company’s books:
Beginning Ending Raw Materials (all direct) $30,000 $10,000 Work in Process $45,000 $35,000 Finished Goods $20,000 $25,000 Costs incurred during the year: Purchases of raw materials (direct) $90,000Direct Labor $40,000Actual overhead $150,000
12. The amount of manufacturing overhead applied to Work in Process is:
a) $165,000 b) $135,000 c) $180,000 d) $160,000
13. The amount of cost of goods manufactured during the year is:
a) $315,000 b) $325,000 c) $360,000 d) $340,000
14. The under or overapplied overhead is:
a) $10,000 overapplied b) $15,000 overapplied c) $15,000 underapplied d) $10,000 underapplied
15. The cost of goods sold (including any under or overapplied overhead) is:
a) $310,000 b) $320,000 c) $300,000 d) $305,000
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16. Finished Goods inventory account is credited when: a) Goods are purchased on account b) Raw materials are purchased c) Goods are sold d) Underapplied overhead is closed
17. Nonmanufacturing costs are:
a) Included in manufacturing overhead b) Not part of the product cost c) Deducted from Work in Process d) Added directly to cost of goods sold
18. The predetermined overhead rate is computed:
a) Using a weighted-average method. b) Using actual activity as an allocation base. c) At the beginning of the year, using estimates d) After all actual costs have been incurred
19. Total manufacturing costs for the period consist of:
a) Direct materials, direct labor and manufacturing overhead applied b) Manufacturing overhead applied and selling expenses c) All expenses incurred, including selling and administrative d) Cost of goods sold plus ending Finished Goods inventory
20. Cost of Goods Sold is derived from:
a) Job-cost sheets b) Raw Materials inventory account c) Finished Goods inventory account d) Estimates for the expected level of sales
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Solutions to Practice Problems Practice Problem #1
Direct materials used: 500 pounds X $25.00 = $12,500Direct labor cost: 90 DLH X $18.00 = $1,620
Predetermined overhead rate: $180,000
= $6.00 per MH 30,000 MHOverhead applied to job B011: $6.00 X 150 MH = $900 Total job cost: $12,500 + $1,620 + $900 = $15,020
Practice Problem #2
Predetermined overhead rate: $550,000
= $22.00 per DL$ $25,000 Overhead applied: $22.00 X $30,000 = $660,000
Manufacturing Overhead
actual applied100,000 10,000 660,00075,000
150,000 25,000
200,000 100,000 overapplied
To close the balance in the manufacturing overhead account:
Manufacturing overhead 100,000 Cost of goods sold 100,000
1. False because the raw materials account is credited when raw materials are issued.
2. True 3. False because cost sheets are used in a job-order system. 4. True 5. True 6. False because the pre-determined rate is computed using estimated overhead. 7. False because underapplied means that the applied overhead is less than the
actual overhead incurred. 8. True 9. False because finished goods is debited for the cost of goods manufactured. 10. True 11. False because factory rent is part of manufacturing overhead. 12. False because selling expenses are expensed as incurred as a period cost. 13. True 14. True 15. True 16. False because work-in-process is not part of the journal entries to record a
sale; finished goods is credited for the cost of the goods sold. 17. False because overhead is credited when overhead is applied. 18. False because the pre-determined overhead rate is computed at the beginning
of the year (hence the prefix “pre”). 19. False because process costing is appropriate when all the products (the
cornflakes) are essentially the same. 20. False because indirect materials issued should be debited to Manufacturing
Overhead.
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Solutions to Multiple Choice Questions 1. A 2. B 3. B 4. D 5. C 6. D 7. A 8. C 9. B 10. C 11. D 12. A 13. B 14. B 15. D 16. C 17. B 18. C 19. A 20. C
